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A puzzle worth solving

Despite economic growth outperforming all other G7 states – rising 2.8% last year – and higher employment than ever, productivity is running approximately 16% lower than pre-crisis levels[1]. Current GDP per-hour worked remains lower than it was in 2007.

As it becomes clearer that the recession can’t be solely responsible for the drop in productivity, the puzzle seems more difficult to crack than ever.

Root causes
The Bank of England has often referred to this issue, which – alongside inflation – is a key concern for the Monetary Policy Committee in determining when to raise interest rates. The Bank’s economists believe that low productivity levels are, to some extent, caused by a lending focus on inefficient enterprises, rather than boosting funding for flourishing businesses.

Others believe the puzzle to be cyclical. When the financial crisis hit, a large proportion of businesses held on to staff in the hope that the economy would pick up and they could avoid large recruitment fees further down the line. This meant that large numbers of people remained employed at a time of low demand, thus dragging national productivity figures down.

But neither of these suggestions explain why, seven years on from the crisis, productivity levels are still suffering.

Productive planning
The Chancellor of the Exchequer, George Osborne, is poised to unveil his ‘productivity plan’ alongside his Summer Budget next week and raising productivity is seen by many experts as crucial to boosting long-term economic growth in the UK.

Productivity, however, may not seem like it requires the immediate attention of the SMEs, but, for the UK to achieve stable economic growth then productivity needs to be at the top of everybody’s agenda.

Productivity is not simply the number of hours worked – it’s about the myriad of business decisions made every day and higher GDP output per hour worked, will enable the Government to invest in businesses, thus providing the financial and environmental stability that SMEs require.

There are lessons to be learnt from countries that are outperforming businesses here in the UK. According to the Organisation for Economic Co-operation and Development, UK nations have the biggest skills gap between those in work and young people who are not in education, employment or training. Addressing this gap is vital to driving productivity forward and in this, SMEs can play their part.

By providing almost 50% of the UK’s economy[2], SMEs are in a position to make a huge impact on the overall productivity rate of the country. Through investment in physical capital and skilled workers, SMEs can boost their own income whilst improving the fortunes of the rest of the UK. However, we cannot expect SMEs to jump into capital expenditure without reassurance from the Government.

Until the Government can promise certainty of funding and taxation, while reflecting lessons learnt from our international counterparts, SMEs will remain in waiting mode and fail to invest for their future.

This required stability is unlikely to be achieved while SMEs are in the dark about whether they will be operating under EU trading law in the years to come.

Once such issues are effectively tackled, improved productivity will undoubtedly follow. Until such time, the Chancellor’s productivity plan will have to suffice.

[1] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q201.pdf

 

[2] http://researchbriefings.files.parliament.uk/documents/SN06078/SN06078.pdf

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